As we all know: That economic prognosis stuff is based on lots of simplifying assumptions. proper prognosis for popular question "what's time lag for 'creation of new software jobs' in reaction to 'high gdp growth'?" would be: In 6 month. Maybe earlier. Maybe later. Maybe never. We use to call it "free market economies". To assemble prognosis more interesting to read, those economists add some simplifying asumptions to their models. Because of the simplifying nature of the assumptions the outcome might be a) correct or b) wrong.

Everybody needs only 1 job. Or maybe 1 job more, which is better paid or perhaps with nicer environment than current job. good luck for everybody Axel

Originally posted by Michael Ernest: Those are merely forward-looking statements and not intended as assurances of any sort that they contain fact or reasonable assumptions of market realities.

The 1929-31 stock market crash was unprecedented in many ways. It was not based upon a speculative bubble akin to the Tulip Bulb craze or the South Seas bubble. Overoptimism, yes. To be sure. But the PE (Price to Earnings) ratio of the New York Stock Exchange at the 1929 peak was about 28, about twice the historical average. To contrast, the average PE of Nasdaq at the peak of the dot.com craze was about 70. The current recession should have been much worse than the Great Depression. The difference was the policy of the US Federal Reserve in 1929 and in crashes since then. The Fed clamed down heavily on liquidity, on the money supply between 1929 and 1931, a policy which was not reversed until the late 30's or early 40's. Since then the Fed has pursued a short-term expansion in the money supply at every mnarket crash, which prevented the market from falling catastropically and forcing the sale of other assets (such as real estate) at ruinous prices.

The 1929-31 stock market crash was unprecedented in many ways. It was not based upon a speculative bubble akin to the Tulip Bulb craze or the South Seas bubble. ...

I'd say the crashes of '87 and '29 look familiar in most respects, with the exception that the margins allowed in trading during the late 20's is no longer permitted without checking for actual assets to back them up.

Originally posted by Michael Ernest: I'd say the crashes of '87 and '29 look familiar in most respects, with the exception that the margins allowed in trading during the late 20's is no longer permitted without checking for actual assets to back them up.

And of course the effect on the economy was different. The crash of '87 did not spin the country into a recession and the markets stableized quickly after the crash. The Dow regained all of its lost wealth within two years. Why the difference? The major difference was that the markets were not heavily margined as in 1929. Also, the Fed tightened the money supply after the 1929 crash making things even worse. For those unfamiliar with the stock market, you can actually purchase stocks by taking a loan out to do it. This is called "buying on margin". In 1929, very little actual cash was needed to purchase stocks. Let's take an example... suppose you put $100 into the stock market and your stock goes up 10%. You have made $10. If your stock goes down 10% then you have lost $10. In other words, a drop of 10% is not going to wipe you out. SUppose you decide to buy $1,000 worth of stock with your $100, paying for the remainder on margin. Now if the stock goes up 10% you make $100, doubling your money! Even after paying for the loan you are still doing well. But what if the stock goes down 10%? You have lost $100 which is your entire investment. And since the broker doesn't want to be stuck with the stock, he will make a margin call, asking you to put more money in to pay for the $900 worth of remaining stock. If you don't have it then he will sell the stock meaning you have lost your entire investment. What if the stock drops 20% before he can sell? Then you will not only lose your $100 but you will owe another $100! The broker may sell your other stocks (also at a loss to you) to pay the $100. You could easily end up losing every penny you have invested. So the difference is that with a 20% drop in the market, the person who invested on margin is wiped out. The person who didn't invest on margin still has 80% of their wealth.

Personal note: I remember Black Monday very well. I was a COBOL porgrammer for Dean Witter, Reynolds Inc. at the time. We spent the entire day staring at the tickers. We knew we were watching history. I was interviewed for TV (one of those "man on the street" things) on the Friday before Black Monday after the market had dropped 100 points. I said that the market was made of sheep and the sheep were panicking.

And of course the effect on the economy was different. The crash of '87 did not spin the country into a recession and the markets stableized quickly after the crash. The Dow regained all of its lost wealth within two years. Why the difference? The major difference was that the markets were not heavily margined as in 1929. Also, the Fed tightened the money supply after the 1929 crash making things even worse.

The Fed tightened the money supply before, during, and after the 29 crash, a major contributing factor in the loss of confidence which caused the enormous drop over 3 years. I don't say that was the only factor, but it did subvert the market's normal recovery mechanisms over time. The stock market fell something like 87% all in between 1929 and the depths of 1932, I think. I think the margining had a large effect in 1929, but most of the heavily-leveraged investors were swept out by the end of 1929. Reverse-gearing had a major effect. But why the continuing fall in 1930 and 1931? Loss of confidence perhaps, but also lack of liquidity. The money wasn't there to buy assets at decent prices, so the few who had the money could wait until prices became absurdly low. The NYSE went from a PE of 28 to something like 5 in the early 30's. Combined with falling corporate profits this dropped values to 13% of their peak.

Originally posted by Thomas Paul:

So the difference is that with a 20% drop in the market, the person who invested on margin is wiped out. The person who didn't invest on margin still has 80% of their wealth.

A non-leveraged investor who bought and held the average stock in 1929 lost 87% of their investment by 1933. 13% is better than 0, but not much better. I suspect that was where the real damage occurred. In the internet age I have to wonder whether the regulation will work anymore. What can the SEC do to brokers operating out of the Grand Cayman islands on the internet, for example? Nothing I suspect. So if people want to use 20's-style gearing today they probably can. Easily. Then there are derivatives. Casino gambling is still with us.....

Originally posted by Thomas Paul: Personal note: I remember Black Monday very well. I was a COBOL porgrammer for Dean Witter, Reynolds Inc. at the time. We spent the entire day staring at the tickers. We knew we were watching history. I was interviewed for TV (one of those "man on the street" things) on the Friday before Black Monday after the market had dropped 100 points. I said that the market was made of sheep and the sheep were panicking.

You're that old, Tom?!!! Did you know Irving Fischer? How about Tom Watson, Senior? ;-) Didn;t know they had COBOL and TV back then, Tom. I know COBOL is ancient, but that ancient?

Mark Herschberg
Sheriff

Joined: Dec 04, 2000
Posts: 6037

posted Dec 29, 2003 09:12:00

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Originally posted by Alfred Neumann:

In the internet age I have to wonder whether the regulation will work anymore. What can the SEC do to brokers operating out of the Grand Cayman islands on the internet, for example? Nothing I suspect. So if people want to use 20's-style gearing today they probably can. Easily. Then there are derivatives. Casino gambling is still with us....

What are you talking about? To be able to trade on the floor, you need to meet SEC and exchange (e.g. NYSE) rules. These do cover such third party agencies indirectly. Now a given broker isn't going to trust some third party without some money in escrow. In theory, a Cayman island company may let me invest on 90% margin, but when they places the order, they either need a seat on the exchange or to deal with a broker who has one. The exchange and/or the broker on the floor isn't going to accept the 90% margin.

--Mark

Thomas Paul
mister krabs
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Joined: May 05, 2000
Posts: 13974

posted Dec 29, 2003 10:29:00

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Originally posted by Alfred Neumann: Didn;t know they had COBOL and TV back then, Tom. I know COBOL is ancient, but that ancient?

That would be Black Monday, 1987.

Thomas Paul
mister krabs
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Joined: May 05, 2000
Posts: 13974

posted Dec 29, 2003 10:42:00

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Originally posted by Alfred Neumann: A non-leveraged investor who bought and held the average stock in 1929 lost 87% of their investment by 1933. 13% is better than 0, but not much better. I suspect that was where the real damage occurred. In the internet age I have to wonder whether the regulation will work anymore. What can the SEC do to brokers operating out of the Grand Cayman islands on the internet, for example? Nothing I suspect. So if people want to use 20's-style gearing today they probably can. Easily. Then there are derivatives. Casino gambling is still with us.....

As to the first point, I doubt that too many people, other than the extremely wealthy, held their stock from 1929 to 1933. (Rock bottom was July 1932.) I would bet that the only people who held were those who did not care about the loss of liquidity and simply assumed that eventually the market would recover to 1929 prices. Of course, the Dow did not get back to that level until 1954. An investor who decided to get out of the market in the Spring of 1930 would have lost between 20% and 30% of his money. The Dow ran up from 150 to 380 in the two years from 1927 to 1929. It then took two years to get back down to 150. The crash wasn't an overnight loss of wealth unless you were buying heavy on margin. As to the second point, if you buy and sell on the NYSE (or any US exchange) you are subject to SEC regulations.